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LARRY KUDLOW: Powell and Biden are getting ready to slaughter the small business sector

(Fox Business)

A lot of news today on both monetary and fiscal policy from the Biden administration and frankly, none of it is particularly good. 

The stock market dropped 500 points on announcements about Federal Reserve policy and some early leaks on the Biden administration budget policy. 

Later in the show we will welcome ace New York Post columnist Miranda Devine to talk about the dramatic January 6 tape release last night by our friend and colleague, Tucker Carlson. 

Back to the money story, a couple of key points. First, Jay Powell is right to say the Fed is going to be raising interest rates much more than previously thought. 

CHAIR POWELL SAYS INTEREST RATES ARE ‘LIKELY TO BE HIGHER’ THAN PREVIOUSLY EXPECTED

The Fed's monumental error in 2021 of inflation is coming back to haunt them two years later as their quest to disinflate back to their 2% target is a lot harder than they and, quite frankly, Wall Street thought.  

I've said before my own hunch that their target rate is going to 6% from the current 4.75%. That's just my hunch. Here is the rub: Powell's justification is all wrong. An unhealthy patient diagnosed incorrectly by his physician will never heal. 

Take a listen to this. 

Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing on Capitol Hill in Washington, U.S., December 1, 2020.  (Susan Walsh/Pool via REUTERS/File Photo)

JEROME POWELL: "The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes." 

Jay Powell arguing for more hawkish rate hikes because the latest economic data is stronger is totally wrong. What he should be saying is that higher rates that reduce excess money are necessary because the latest price data are stronger than expected. 

What the central bank should want to do is bring down inflation, not kill growth or the whole economy, or middle-class families, or blue-collar jobs. If he'd used the price justification, he'd be on target. 

The Cleveland Fed's median CPI, which chops off the high and low-price outliers, is running 7.1% year-on-year. The actual CPI is up 6.4%.  The Atlanta Fed wage tracker is over 6%. Using those price measures, a 4.75% Fed funds rate is below the inflation rate and is therefore a negative real target rate. 

In that sense, the Fed is not tight. It's still loose. I know other measures have steadied down. Broad-based commodity indexes, which is a good thing but if the totality of inflation indexes is three times the 2% target, that's a bad thing. 

The goal of monetary policy should be price stability, not a high unemployment rate or a recession. The other goal should be to maintain steady living standards with a steady value of the money in your wallets and pocketbooks. 

Powell should explain this, but he doesn't. Then the other problem is budget policy. We are learning that the Biden budget, when it comes out, is going to be chockful of tax hikes on successful earners, on investments, and on small businesses. 

This is the backbone of the job-creating economy. Apparently, Biden wants to slap a 5% tax rate on income above $400,000 on capital gains and on small businesses. Small businesses, by the way, are responsible for 60-70% of the jobs in this country, and probably roughly the same amount of economic activity. 

It sounds like both Powell and Biden are getting ready to slaughter the small business sector. This is not good. Biden says he's doing it to save Medicare, but a slumping economy from higher tax rates will make the Medicare and Social Security budgets even worse as the economy declines. This makes no sense at all. 

video

Biden budget to reignite debate over spending

Former Acting White House Chief of Staff Mick Mulvaney discusses Biden’s FY2024 budget, arguing Congress needs to look at what they want to spend.

This comes on top of tax hikes already legislated, including a minimum tax on corporations, an end to the immediate bonus depreciation on the R&D tax credit, a reduction from 100% to 80% expensing on new business equipment and continued efforts by Janet Yellen to put together some kind of crazy tax on American companies operating overseas. 

Every single one of these is a prosperity killer. Every single one of these is a job killer. Every single one of these tax hikes is inflationary, because, even if the Fed reduces the supply of money, these dumb tax hikes will reduce the supply of goods even more, creating higher prices. 

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Remember Art Laffer: "Producing more apples is counter inflationary, producing fewer apples raises their price." 

Joe Biden and Jay Powell, are you listening? 

This article is adapted from Larry Kudlow’s opening commentary on the March 7, 2023, edition of ‘Kudlow.’ 

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